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You may start dreaming of a family holiday or a weekend getaway with friends as COVID-19 vaccinations become more widely available and people get more used to travelling.

Loans for holidays can be used to pay for everything from accommodation and meals to travelling expenses as you can compare loans. However, the reality of these loans is more depressing. Not only do holiday loans have the potential for high interest rates and fees, but they also have a long-term need for monthly payments.

How do holiday loans work?

A personal loan for travel is called a holiday loan. You can use the profits from most personal loans to pay for travel-related expenses, including accommodation, rental cars and other transport costs, even if the lender does not specifically market the loan as a holiday loan.

Since holiday loans are often unsecured, you don't need to provide any collateral. This means that compared to alternatives like credit cards with 0 %, interest rates can be higher and terms less favourable.

How do travel loans work?

Even if the lender does not offer loans specifically for holidays, most holiday loans work in the same way as other personal loans. Depending on the lender, loan amounts can range from $1,000 to $100,000. Lenders may offer shorter or longer repayment periods, although terms typically range from two to seven years.

Like the fees, interest rates vary by lender but are generally determined by your creditworthiness, income and other factors. Interest rates usually range from 5 % to 36 %, with the lowest rates going to the applicants with the best credit rating.

Therefore, interest rates on holiday loans may be higher than interest rates on secured loans, even if they are lower than interest rates on credit cards.

Who should consider a holiday loan?

Travel costs can be financed and paid for using a holiday loan. But doing so means paying interest throughout the duration of the loan, which increases the overall cost of the trip. Defaulting on a holiday loan can lower your credit rating and make it more difficult for you to get a loan in the future.

Because of these factors, it is often not worth going into debt to finance a holiday. However, if you have to travel for work or an emergency and need money to pay for plane tickets, accommodation or other costs, a loan may be your only choice. When offered the chance to go on holiday, some people also consider that a holiday loan is worth taking.

Borrowers can use personal loans to get money when they need it and then spread out the fixed payments over time. This means you don't have to pay your holiday costs in advance, but you do have to pay interest on any loans you take out.

Credit card users usually pay 15 % for ongoing accounts and 18 % for new offers. You may be able to borrow money with a holiday loan at a lower rate depending on your creditworthiness and other variables.

The loan balance plus interest must be repaid by the borrowers. This increases the price of a holiday compared to what it would be with a cash payment. For example, a $10,000 holiday loan with an interest rate of 12 % and a period of 36 months would result in interest payments totalling $1,957.15 for the borrower.